Modern commercial general liability (CGL) policies provide coverage for personal and advertising injury. This type of coverage is discussed extensively in Practical Tools for Handling Insurance Cases, §§ 13.32-13:53 (Thomson Reuters 2011). One of the enumerated offenses for this type of coverage involves “[o]ral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” Recently, a California Appellate Court rendered a decision which strained the boundary line when it found coverage for this enumerated offense where the allegation involved a retailer’s selling of products at a discount.
Travelers Property Cas. Co. of America v. Charlotte Russe Holding Inc., 207 Cal.App.4th 969, 144 Cal.Rptr.3d 12 (Cal. App. 2nd Dist. 2012), rev. denied (2012), involved coverage for a manufacturer’s allegation that a national retailer had offered the manufacturer’s products for sale at severely discounted prices, resulting in a diminution of the brand. The national retailer submitted the claim to Travelers alleging that it triggered personal injury coverage for product disparagement.
Charlotte Russe, a national retailer, contracted in December 2008 with Versatile Entertainment, and its parent company, People’s Liberation Inc. (collectively Versatile) under which Charlotte Russe became the exclusive sales outlet for Versatile’s “People’s Liberation” brand of apparel, which included jeans and knits. In the complaint brought against Charlotte Russe, Versatile identified the People’s Liberation brand as a premium, high-end brand in which Versatile had invested millions of dollars developing that brand so it would become associated in the marketplace with high end casual apparel, distributed exclusively through fine department stores and boutiques. 207 Cal.App.4th at 972, 144 Cal.Rptr.3d at 15.
Versatile alleged that while Charlotte Russe had never offered this type of apparel for sale at the higher price point commanded by a premium brand, Charlotte Russe had promised to provide the investment and support necessary to promote the sale of premium brand denim and knit products for Versatile in order to encourage its customers to purchase such premium products at Charlotte Russe stores. It was alleged that Charlotte Russe failed to live up to these representations. Versatile alleged that Charlotte Russe held a “fire sale” of People’s Liberation branded apparel at “close-out” prices and that the sale of Versatile’s premium brand clothing at severe discounts not only violated the parties’ agreement but that the fire sale resulted in significant and irreparable damage to and diminution of the People’s Liberation brand and trademark.
Versatile’s allegations of discounting apparently involved Charlotte Russe publicly displaying signs in store windows and on clothing racks announcing that People’s Liberation brand jeans were on sale as well as on Charlotte Russe’s written markdowns on individual People’s Liberation clothing items. The alleged discounts involved price markdowns of 70 percent to 85 percent. Based on an experienced apparel industry expert, the markdowns and dramatic price reductions had the potential to have a disparaging effect on the People’s Liberation brand because it suggested to consumers that the product – particularly premium high-end or luxury goods such as People’s Liberation brand products – were of inferior quality. Id. at 973, 144 Cal.Rptr.3d at 16.
The court found that Versatile’s allegations could reasonably be interpreted to allege that Charlotte Russe disparaged the People’s Liberation brand and led to potential customers believing that it was not a premium, high-end brand. Therefore, it was improper for the trial court to grant summary judgment in favor of Travelers. In so holding, the court rejected Travelers’ contention that allegations of price discounts did not accuse Charlotte Russe of either product disparagement or false statements and therefore those allegations did not trigger the policies’ personal injury or advertising injury coverage and did not give rise to a duty to defend. See 207 Cal.App.4th at 978, 144 Cal.Rptr.3d at 19.
The court also rejected Travelers’ contention that “disparagement,” in the insurance context, referred “to the tort of trade libel,” which is a tort that required pleading and proof of a false statement of fact. Versatile did not allege any “injurious false statement disparaging Versatile’s products.” 207 Cal.App.4th at 979, 144 Cal.Rptr.3d at 20. In rejecting this argument, the court pointed to the fact that Versatile’s pleadings alleged that the People’s Liberation brand had been identified in the marketplace as high-end goods and that Charlotte Russe had published prices for those goods implying that they were not premium, high-end goods. The allegations made by Versatile carried with them the implication that Charlotte Russe’s pricing was false because the goods were, in fact, premium and high-end.
That was enough to trigger coverage according to the court. 207 Cal.App.4th at 979, 144 Cal.Rptr.3d at 20-21 (citing Nichols v. Great American Ins. Cos., 169 Cal.App.3d 766, 774, 215 Cal.Rptr. 416 (1985) (statement may constitute product disparagement if plaintiff pleads facts showing the statements’ defamatory meaning “by innuendo”); E.piphany Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244, 1253-1254 (N.D. Cal. 2008) (insured’s claim of superiority of its products necessarily implied inferiority of competitor’s products)).
The court observed:
“[W]e cannot rule out the possibility that Versatile’s pleadings could be understood to charge that the dramatic discounts at which the People’s Liberation products were being sold communicated to potential customers the implication – false, according to Versatile – that the products were not (or that the Charlotte Russe parties did not believe them to be) premium, high-end goods. Arguably, a trade libel claim might survive under these theories. According to the comments to the Restatement Second of Torts, the concept of trade libel encompasses ‘a statement in the form of an opinion, if the statement implies the existence of undisclosed facts that justify the opinion….’” 207 Cal.App.4th at 980, 144 Cal.Rptr.3d at 21 (citations omitted).
Finally, in rejecting the trade libel tort argument, the court noted that the phraseology of the coverage made coverage for disparagement an alternative to coverage for libelous materials and was not just an element of that coverage. The policy covered publications of material either that slandered or libeled a person or organization, or that disparaged a person’s or organization’s goods, products or services. Because of this language, both were not required to establish coverage.
The California courts have strained personal and advertising injury coverage to the extreme point of requiring a defense of insureds who sell products at discounted prices because of the implication that the discounting of prices suggests inferiority of those products. At what point in the discounting process does the product become disparaged?
For example, is a 70 percent discount a potential disparagement during normal retail business operations but may not be a disparagement during marketplace acknowledged sales campaigns on holidays like Memorial Day.
If a store advertises itself as going out of business, does that fact result in no coverage and defense obligation when products are sold at what some would call a fire sale?
What about close-outs on products when the season’s new fashions are offered to the public for the first time?